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CARMELO SANTORO : Behind the Scenes at a Merger : Silicon Systems Sees Deal as Leading to $1 Billion in Sales

July 31, 1989|David Olmos | Times Staff Writer

When Carmelo Santoro joined Silicon Systems Inc. in 1982, the Tustin company was a rather unspectacular maker of custom computer chips with annual sales of about $13 million.

Santoro, Silicon Systems' president and a veteran of computer chip manufacturers such as Motorola, RCA and IBM, soon realized that the Tustin firm would have to devise a new strategy if it was to grow into a major company. That new strategy, he decided, would be to go after speciality markets that large chip producers ignore.

By focusing on the market for custom chips for the telecommunications and computer disk drive industries, Silicon Systems' revenues spurted to $56 million in 1984 and $120 million by 1988.

Silicon Systems' strategy was successful enough to attract the attention of Japan-based TDK Corp., which in April announced that it was acquiring the Tustin firm for $224 million, or $20 a share. TDK is a $3.4-billion public company that is best known as a producer of audiotapes, videotapes and computer disks.

With TDK's backing, Santoro believes the Tustin company could top $1 billion in sales by 1998.

Santoro, 48, graduated from Manhattan College in Riverdale, N.Y., and received a doctorate in physics from Rensselaer Polytechnic Institute in Troy, N.Y. He joined Silicon Systems as president and chief operating officer in 1982, and was named chairman and chief executive officer in 1984.

He and his wife, Nancy, live in Laguna Hills.

In this recent interview with Times Staff Writer David Olmos, Santoro discussed how and why the merger came to pass.

Q. Why did you decide to sell the company?

A. It goes back to the whole problem of capital formation for small and medium-size companies. And, particularly, for companies that are in capital-intensive industries. The semiconductor industry is a lot like the oil-drilling industry. The cost of the facilities and equipment, which allows you to design, manufacture and be competitive in producing semiconductors, is extremely high. And the return on that investment comes from being able to use that equipment to make the huge volume of product. It used to be that American companies could form capital in the public market relatively easily. You can form capital in two ways, either with debt or with equity. Making a debt offering was out of the question for Silicon Systems. And making an equity offering also was unattractive. Silicon Systems was a company that had struggled in the public marketplace for eight years. We had a good story to tell and great earnings relative to our industry. But we were recognizing the need for cash. When someone came after us with a very lucrative offer to allay that concern, we listened.

Q. How did the merger with TDK get started?

A. I've been contacted repeatedly in the last eight years as to whether I was interested in merging or being acquired. Nearly all the time my answer was no. Once in 1983, I believe, there was a big rumor going around that The Plessey Co. was going to acquire us. There haven't been any more serious rumors since that time. But after the (stock market) crash in 1987, I was approached by a consultant who asked me if I thought I might want to entertain being acquired. I said, 'You're asking me exactly at the wrong time. I mean, our stock is at a very low point.' Anyway the consultant went away, then came back in January, 1988, and asked me again. Now our stock had risen to the $12 range. We had just finished a year where we had sales of $82 million and earnings of 42 cents a share coming off of an industry recession in 1985 and 1986. We were really comfortable. I told the consultant that I wasn't sure I wanted to discuss an acquisition because I thought we were going to have a great year in 1988, break $100 million in sales and earn $1 per share, and that we'd have a $20 stock.

Q. So what did you tell the consultant next?

A. I said there's no sense in me talking to anybody who's not willing to look at a multiple of near 150%. So, the consultant went away and then came back late January or early February to say that the company that wanted to acquire us was TDK.

Q. So you met with TDK's representatives, and what happened?

A. TDK and its bankers came here for two meetings. Afterwards, (TDK's representatives) said I was very American, which meant I didn't have a lot of time to talk, and the first question that came out of my mouth was: 'How much?' Anyway, the negotiations broke down. We said, 'Let's stop talking because we're miles apart.' And we stopped.

Q. And the company did pretty well after that, right?

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